A candlestick is a type of chart used to display the price movement of a financial instrument over a specific time period. Each candlestick is composed of several parts:

The Real Body: This is the rectangular area between the open and close prices. If the close price is higher than the open price, the real body is typically colored white or green, indicating a price increase. If the close price is lower than the open price, the real body is typically colored black or red, indicating a price decrease.

The Upper Shadow: This is the line that extends above the real body, representing the highest price reached during the time period.

The Lower Shadow: This is the line that extends below the real body, representing the lowest price reached during the time period.

The Wick: This is the line that connects the upper and lower shadows. It is also known as the "tail"or"shadow."

Candlestick can be used to identify pattern and trend in the price movement of a instrument and can be used in TA

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Flags are among the most-referred patterns in technical analysis that can provide clues to the price trend and potential next move.

In technical analysis, a flag pattern indicates short-term price movements inside a parallelogram coounter to the previous long-term trend. Traditional analysts view flags as potential trend continuation indicators.

There are two types of flag patterns: bull flag and bear flag. While their outcomes are different, each flag exhibits five key characteristics, as listed below:

The strong preceding trend (flagpole or pole)

The consolidation channel (the flag itself)

The trading volume pattern

A breakout

A confirmation of the price moving in the direction of its previous trend.

In this article, we discuss bull and bear flag patterns and how to trade them.

What is a bull flag pattern?

A bull flag is a technical pattern that appears when the price consolidates lower inside a downward-sloping channel after a strong uptrend. The said channel comprises two parallel, rising trendlines. Kindly note that the pattern could be a wedge or a pennant if the trendlines converge.

The volume typically dries up during consolidation, implying that traders associated with the preceding trend have less urgency to buy or sell during the consolidation period.

Bull flag

The urgency to jump in by new and old investors, or “FOMO” (fear of missing out), typically returns when the price breaks above the bull flag’s upper trendline, thus boosting trading volumes.

As a result, analysts view strong volumes as a sign of a successful bull flag breakout.

On the other hand, lackluster volumes when the price breaks above the bull flag's upper trendline increase the possibility of a fakeout. In other words, the price risks dropping below the upper trendline, thus invalidating the bullish continuation setup.

Trading a bull flag setup

Traders can enter a long position at the bottom of a bull flag in anticipation that the price’s next run-up toward the pattern’s upper trendline will result in a breakout. The more risk-averse traders can wait for a breakout confirmation before opening a long position. 

As for the upside target, a bull flag breakout typically prompts the price to rise by as much as the flagpole’s size when measured from the flag’s bottom.

The following Bitcoin price pattern between December 2020 and February 2021 shows a successful bull flag breakout setup.

BTC/USD daily price

As a note of caution, traders should maintain their risks by placing a stop loss just below their entry levels. That will enable them to reduce their losses if the bull flag gets invalidated.

What is a bear flag pattern

A bear flag pattern is the opposite of a bull flag pattern, exhibiting an initial downside move followed by an upward consolidation inside a parallel channel. The downside move is called the flagpole, and the upward consolidation channel is the bear flag itself.

Meanwhile, the period of bear flag formation tends to coincide with declining trading volumes.

Bear Flag

Trading a bear flag pattern

The following is an illustration of how to trade bear flag pattern on crypto charts.

BTC/USD daily price chart featuring a bear flag breakdown

In the Bitcoin chart above, the price has formed a flagpole followed by an upward retracement inside a rising parallel channel. Eventually, BTC price breaks out of the channel range to the downside and drops by as much as the flagpole’s height. 

Traders can choose to open a short position on a pullback from the flag’s upper trendline or wait until the price breaks below the lower trendline with rising volumes.

In either case, the short target is, as a rule, measured by subtracting the flag’s peak from the flagpole size.

Meanwhile, a breakdown below the flag’s lower trendline accompanying lackluster volumes suggests a fakeout, meaning the price may reclaim the lower trendline as support for a potential rebound inside the parallel channel.

To limit losses in a fakeout scenario, it is important to place a stop loss just above the entry levels. 

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During the analyses, you can often see all kinds of charts and diagrams from which they "predict" or just analyze what happened. In this regard, we have collected a few things for you to pay attention to when looking at these charts.

What are candles?

A candlestick is a type of price chart used in technical analysis that displays the high, low, and opening and closing prices of an asset for a given time period.

This method originated with Japanese rice traders who used it to track market prices and daily movements hundreds of years before it became popular in the United States.

The wide part of the candle is called the "real body". This shows traders where the price opened and closed within a given time period. And the wicks of the candle show the maximum and minimum price within the given period.

Source: Investopedia

Candles reflect the impact of investor sentiment on asset prices and are used by technical analysts to determine when to enter or exit trades. Candles can be used for any liquid financial instrument, such as stocks, currencies and futures.

Long green candles indicate strong buying pressure, meaning the price is rising. However, they should be examined in the context of the market structure, not individually. For example, a long green candle is likely to have more significance if it forms at a significant price support level. Long red candles, on the other hand, indicate significant selling pressure. This suggests that the price is falling.

By observing these candles, we can see trading patterns in the long or short term, which are used in the analysis.

The movements of Bitcoin in 2021. Source: trandingview.com

What is technical analysis?

Technical analysis, in short, is a trading discipline used to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement or volume.

Unlike fundamental analysis, technical analysis focuses on the study of price and volume. Technical analysis is often used to generate short-term trading signals, but it can also help assess the strength or weakness of an asset relative to the market. Information from the analysis helps analysts improve their overall valuation estimate.

Technical analysis as we know it today was founded by Charles Dow and the Dow Theory in the late 1800s. Today, technical analysis includes hundreds of patterns and signals developed over years of research.

Technical analysis is based on the assumption that past trading activity and price changes of an asset can be indicators of the future movement of the asset's price. So, it attempts to predict the price movement of any trading instrument that is subject to the forces of supply and demand, including stocks, bonds, futures, and currency pairs.

In fact, some view technical analysis simply as the study of supply and demand forces as reflected in the movement of an asset's market price. Technical analysis is most often concerned with price movements, but some analysts track numbers other than prices, such as trading volume.

Forms and market signals

There are hundreds of patterns and signals in the industry that have been developed by researchers to support trading with technical analysis. Some indicators primarily attempt to identify the market trend, such as support and resistance areas, while other indicators show the strength of the trend and the likelihood of its continuation. Commonly used indicators and chart patterns include trend lines, channels, moving averages, and momentum indicators.

A few examples of frequently used indicators:

Price trends

Chart samples

Volume and momentum indicators

Oscillators

Moving averages

Support and resistance levels

Limitations of technical analysis

A common criticism of technical analysis is that history does not exactly repeat itself, so the examination of the price pattern is of dubious importance and can be ignored.

His other criticism is that it only works in certain cases, but only because it has a self-fulfilling effect. For example, when a trader places a stop-loss order below the 200-day moving average of the price of a certain asset. If many traders have done this and the stock reaches this price, there will be a large number of sell orders that will push the price down, confirming the move traders expect.

Of course, knowledge of technical analysis offers its users an advantage in the market and is often used by professional analysts in conjunction with other forms of research.

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The “dragonfly” doji imply, that sellers (Bears) controlled the market for most of the trading period, but then the buyers (Bulls) managed to push price back to the open price before the close. While the “gravestone” doji imply, that buyers (Bulls) controlled the market for most of the trading period, before the Sellers (Bears) managed to push price back to the open price before the close.

While tradition and long-legged doji's are reflective of indecision and stalling, gravestone and dragonfly are generally clearer, stronger indicators that a force is stepping in to push the market in the opposite direction. Therefore, the gravestone and dragonfly dojis are stronger doji's with respect to indicating a reversal compared to the tradition and long legged Dojis.

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